In a time of record profits for dealers, some may be wondering how long the good times will roll. The shortage of inventory has worked in dealers’ favor, allowing for an average selling price of $1,000 above MSRP. At the same time, OEMs have cut incentives, leading to higher profits for automakers.
Supply and demand dynamics are driving higher prices for now, but what happens once supply evens out? Will dealerships return to gluts of unsold inventory and be forced to cut prices once again?
How the Industry Could Sustain Profits
You may be tempted to think that automakers could simply keep supply tight to drive higher prices. While that would work in theory, it would be highly unprofitable for the manufacturers and suppliers. Factories aim for at least 80% capacity utilization. This is because fixed costs for factories are huge, meaning they lose money when they are not producing. That’s why automakers have historically pumped out inventory at a steady rate, which can lead to an overabundance of vehicles on dealers’ lots. The supply chain cannot simply be turned on and off.
As manufacturers work through the inventory shortage and supply chain disruptions to restore factory output, another approach is starting to become popular. The chip shortage has pushed some carmakers to focus on more profitable and expensive models. Consumers have shown they are willing to pay higher prices for more premium vehicles. If chips must be rationed, manufacturers are going to focus on cars that offer the best margins.
This approach, if sustained long-term, could lead to fewer unpopular trim levels being sent to dealers. It’s expensive for dealers to hold unsold inventory, and a 30-day inventory is often the sweet spot. Dealers would be able to avoid discounting below MSRP, and thriftier customers could turn to the used car market to find lower prices.
Where the Dealership Model Fits Into the Future
Some industry experts have questioned the role of dealerships moving forward. The most notorious disruptor, Tesla, has flourished with a direct-to-consumer sales model. Other OEMs could interpret customers’ willingness to pay high prices and wait months for delivery as a sign that middlemen are no longer needed.
On the other hand, brands like Cadillac have reiterated the importance of dealers in the customer sales experience. The OEM-dealer relationship could benefit from changes that align supply more closely with demand. Instead of OEMs offloading inventory onto dealers, who then must either hold it at a cost or discount it to sell quickly, shared inventory pools could become the new approach. Manufacturers could offer these inventory pools to dealers within the same locality, and dealerships could compete on customer service and experience rather than deals.
While the dynamics between manufacturers and dealers are likely to change, there are many situations where these changes can be positive. Time will tell how the relationship evolves and how the market’s response plays into the mix.